Learning About Encana From Its Neighbors

| About: Encana Corporation (ECA)


New management did not disclose many specifics in last CC.

Several offsetting operators have provided more color about ECA in their own Q2.

Overall strong operating performance; TMS on track to commercial status by year end.

Encana's (NYSE:ECA) new management team does not provide many specifics on the operating performance of each of their plays. This article reviews their six core plays through the lens of their neighboring operators (offsetting operators) that have disclosed more details than ECA in their region of operations. Performance metrics provided by ECA match those given by neighbors but the neighboring operators provide more color on the progress made in every area.

Shale drilling has a steep learning curve. As EOG (NYSE:EOG) stated recently, they are only in the sixth innings of the Eagleford; one of the most drilled and understood plays in North America. Many plays are still in their first innings. The broader message is that each and every play reviewed below is getting better every quarter; through downspacing efforts, faster completion, longer fracks, more sand, and different completion techniques, the industry is learning how to maximize their shale assets. Hopefully, the figures below will be helpful in understanding the quality of the acreage Encana still has after its numerous divestitures in the last year. The article first reviews each of the six core plays in turn (4 in the US, 2 in Canada) and then very briefly reviews the four remaining "non-core" assets still in their possession (more gas heavy, but remaining within ECA, at least for the time being).

  • San Juan: ECA accumulated a large position in the Tier 1 oil window. Its acreage is the following:

Source: Encana (July 2014 investor presentation)

One of their offset operators is WPX Energy (NYSE:WPX).

Source: WPX (2nd quarter)

Their production is up significantly in the region. Reduced well costs due to much faster completion times are allowing the firm to increase its forecasted production.

Source: WPX (2nd quarter)

Source: WPX (2nd quarter)

There is a clear improvement (at least after 140 days) in the newer wells relative to the 2013 wells.

As is clear from WPX's 2nd quarter, the San Juan play is getting better by the day. They are the offset operator to Encana. Encana mentioned in passing (they said they acquired more land and were bringing a new rig to the play); they also said were seeing improved performance in the play. WPX provides more color and shows a significant increase in well performance in 2014 relative to 2013.

  • DJ Basin: In the DJ Basin, ECA's acreage is the following:

Source: ECA (July 2014)

ECA is at the heart of the Wattenberg field, next to Bonanza Creek (NYSE:BCEI).

Source: BCEI (2nd quarter 2014)

Bonanza Creek is seeing dramatic improvements through downspacing and longer fracs:

Source: BCEI (2nd quarter 2014)

ECA has similar type curve and assumptions. Again, what BCEI is telling though is that these type curves are going to be surpassed; at least according to the string of latest wells.

Similarly, Noble (NYSE:NBL) is also an operator close to ECA. Their "Core" land is nearby some of ECA's acreage and here again, the performance is getting better through new completion techniques and downspacing efforts:

Source: Noble (2nd quarter 2014)

Lastly, there were some pipeline capacity issues in the region and it seems new capacity is being put in place rapidly to ease the flow:

Source: BCEI (2nd quarter 2014)

  • Eagle Ford: In the Eagleford ECA's acreage is the following:

Source: ECA (June 2014 presentation)

In yellow is ECA's acquired acreage from Freeport McMoran (NYSE:FCX). In green is EOG, all around them in the oil window; more precisely in the Karnes Trough area (sweet spot of the play).

Here are the most recent wells by EOG in the area:

Source: EOG (2nd quarter 2014 presentation)

The McCoy Unit 2H and 1H delivered among the best IPs for horizontal play in the US. These wells were drilled very close to ECA's acquired acreage, which bodes well for the future as ECA gets to ramp up production from two rigs to six rigs in the play by next year. The Eagle Ford, like all of these plays, seem to offer significant upside potential through learning:

Source: EOG (2nd quarter 2014 presentation)

  • Tuscaloosa Marine Shale (TMS): In the TMS, ECA's acreage is the following:

Source: Encana (July 2014 investor presentation)

One of their partners in the region is Goodrich Petroleum (GDP); they have some JVs together and their acreage is the following:

Source: Goodrich (June 2014 presentation)

ECA was especially guarded on its performance up to date in the TMS during the CC. It simply said in the CC that the wells were meeting their type curve and that the firm was on track to announce commercial drilling by year end. The tone was definitely positive during the call but without any details, the financial community was left guessing. Goodrich clarified somewhat the situation last week in their own Q2 press release with the following well results (source: Seeking Alpha):

"The 81H-1 well had an 24-hour IP rate of 900 BOE/d (96% crude), the non-operated Lewis 7-18H-1 had an 24-hour IP rate of 1,500 BOE/d (93% oil), and the non-operated Mathis 29-32H-1 had an 24-hour IP rate of 1,300 BOE/d (92% crude)."

The non-operated wells are actually operated by ECA. Further details on the TMS well results (including flatter decline curves for wells with lower IPs) can be found in the Seeking Alpha article above. The news made GDP and Halcon (NYSE:HK) jump on the day. ECA's response was positive but more muted given the smaller impact of TMS on its much larger operations.

In Canada:

  • Montney: In the Montney, ECA's acreage is the following:

Source: Encana (July presentation)

Encana is the dominant player in the heart of the Montney (300m of thickness). One of their direct neighbors is Advantage Oil and Gas (NYSE:AAV), and their acreage is the following:

Source: AAV (July presentation)

AAV provides significantly more color in terms of the play and how it has developed over time. In particular, it highlights the significant outperformance of the most recent wells in the region:

Source: AAV (July presentation)

Other operators in the Montney, such as Crew Energy (OTCPK:CWEGF) and Delphi (OTCPK:DPGYF) have also recently announced outperforming wells.

  • Duvernay: In the Duvernay, ECA's acreage is the following:

Source: Encana (July 2014 presentation)

The Kaybob area is the area entering full shale production mode. A closer look to that region shows its neighbors:

Source: Trilogy (May 2014 presentation)

ECA is in turquoise and in orange is Yoho (OTCPK:YOHOF); a small neighbor, which came out with two strong wells in July of this year. See link here. ECA is into pad drilling in the region and just added a third eight-well pad into the play according to its last CC with analysts.

Beyond their six core plays just reviewed above, ECA still has other assets. They include

  • A 54% stake in Prairiesky (OTC:PREKF):

Source: Encana (October 2013 presentation)

Prairiesky, formerly known as Clearwater, represents more than 4.8M net acres over which it collects royalties to operators (including Encana) that produce on their land.

  • Deep Panuke: There only offshore play (premium pricing power relative to onshore wells)

Source: Encana (October 2013 presentation)

  • Haynesville acreage: In the news very recently with Shell (NYSE:RDS.A) selling to Blackstone (NYSE:BX) their 50% non-operating stake in the joint venture: 184K net acres, with 2200 locations in the sweet spot with refrack possibilities according to latest CC.

Source: Encana (October 2013 presentation)

  • Piceance: Mostly natural gas with 800K net acres (> 8,000 wells) and liquids content (Niobrara) in the Southern portion of the play

Source: Encana (October 2013 presentation)

In conclusion, the article overviews the different plays where ECA operates. In particular, the article provides more color on the recent performance of these assets through the disclosure given by offsetting operators given that ECA is relatively coy when it comes to specifics of its different plays. The overall message is that ECA has amassed significant acreage over the years, most often in the sweet spot, and today is turning this large position into a very profitable operation through a highly accretive "shale development" phase. Both ECA and their neighboring operators have proven that shale drilling is still in its early phase and that reserves, production numbers and overall profitability will keep increasing in the years to come.

The two biggest risks remain (1) volatility in the commodity markets (due in particular to future takeaway capacity constraints issues) and (2) increased regulation. These risks affect most oil and gas operators in North America. In order to manage these risks, ECA has opted for a more balanced portfolio of natural gas and liquids and oil assets; as well as for a diversified base of assets that avoids concentrating all the risks in one play (e.g. TMS) or one state (e.g. Colorado and recent concerns of more regulations there through the ballot (removed last week)). It seems this strategy will serve them well going forward.

Disclosure: The author is long ECA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author has call options on ECA with different maturities. He also has investments in AAV, CWEGF, DPGYF.

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